Credit Clear Ltd (ASX: CCR) shares have been among some of the most traded on the ASX these last few weeks.
The new fintech listed on the ASX in October after raising $15 million through its initial public offering (IPO). Since then, the CCR share price has more than doubled and currently trades at around $0.80 per share at the time of writing.
Here’s a bit of background into Credit Clear and some of my own thoughts.
What does Credit Clear do?
If you have a browse of the company’s website or have a read through investor presentations, you might still be unsure of what exactly this company does. Don’t be fooled by the standard buzzwords it uses like machine learning, artificial intelligence and other flashy words with little substance.
Credit Clear works in the debt collection industry, and if you are unfamiliar with this field and how it works, I recommend that you read my article I’ve recently written about Credit Corp which explains a little bit about how debt collection has traditionally worked in Australia.
To summarise extremely quickly, debt collection typically works by companies such as Credit Corp buying outstanding customer debts (PDLs) off other companies for a fraction of the face value amount and then attempting to collect the full amount from the customer who has originally defaulted.
In an attempt to disrupt this industry, Credit Clear has developed its own proprietary digital billing and communication technology platform which allows organisations to manage communications and payment arrangements with their customers through an interactive digital and mobile interface.
So, instead of buying debt ledgers and collecting on these accounts, Credit Clear services its customers such as AGL Energy (ASX: AGL) and Transurban Group (ASX: TCL) which use its proprietary platform to automate the debt collection process. Credit Corp collects a fee per communication that is sent out to the customer, as well as per active account.
How the vertically integrated model works
If Credit Clear’s customers are unsuccessful in collecting the outstanding account, the company has another weapon in its arsenal called Credit Solutions. This operates as a contingent collection agency and earns a percentage of the collected amount as it works on behalf of its customers.
Credit Solutions was acquired in 2019 and has over 800 clients across state and local governments, utilities, telecommunications and consumer finance sectors.
As an additional layer of security, the company also owns Oakbridge Lawyers. The idea here is that hypothetically if Credit Clear was still unsuccessful in collecting an outstanding amount, Lawyers can initiate legal proceedings that force debtors into paying their owed amount by repossession of assets of garnishing of wages.
Some concerns I hold
I like the direction this company is going, but I’m not entirely certain that the sentiment-driven rally we’ve seen recently was completely justified. Additionally, I have some doubts over the transparency of management’s communications. The market update on the 27th of October doesn’t give any explicit revenue amounts for the quarter and seems to emphasise the number of customer accounts and communications that have been sent.
If you take a look at the audited FY20 income statement below, despite the company having 250,000 active accounts and millions of communications sent each month, communication revenue makes up such a small portion of the overall revenue. The only reason the company has gone from revenue of $0.9 million in FY19 to $6.4 million in 2020 was due to the acquisitions of Credit Solutions and Oakbridge Lawyers which make up the majority of the revenue.
I’m aware the company is in a growth phase and it’s expected to grow the communications segment, but I think these market updates are vague, don’t explicitly state quarterly revenues and seem to emphasise the millions of communications, which hasn’t actually translated into actual revenue.
Competition
There’s a reason why traditional debt collection is so profitable, just take a look at Credit Corp Ltd (ASX: CCP), for example. My main concern is that Credit Clear is up against huge competition and might struggle to keep up without the ability to purchase debt ledgers (PDLs) while it relies on other revenue streams.
I would also point out that Credit Clear isn’t the first company to use digital methods for debt collection. All the big players already have digital services that can be used to make payments and set up payment plans.
The only difference is that Credit Clear uses “artificial intelligence” to determine what time of the day and through which method of communication — most notably via Facebook Messenger, SMS or email – a debtor prefers to be reached on paying their overdue fees.
As someone who has worked in debt collection, I can assure you it doesn’t matter what channel is used, as 99% of debtors don’t want to pay their account regardless.
Summary
I would want to see a demonstrated track history of growth in its communications revenue before I’d be a shareholder of Credit Clear.
The number of buzzwords used is genuinely concerning to me and I struggle to see how it will translate into increased collection rates. As I mentioned earlier, no one wants to pay their outstanding accounts. If they get a personalised message at a certain time on a certain platform – does that really matter to their decision repayments? I question how this is going to make someone want to pay their account? I think there’s a reason they defaulted in the first place, they don’t want to pay.
Additionally, Credit Clear is operating in an extremely regulated industry against large competitors that have a proven debt purchasing model and are extremely profitable. This one’s a no from me.
